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Tensions between health plans and care providers have taken an fascinating turn in Chicago. Blue Cross Blue Shield of Illinois (BCBSIL) is refusing to allow care providers “affiliated” through a clinical integration agreement to negotiate contracts jointly.

The ramifications for future network contracts are significant and could play out very differently in other health care markets.

Background

In February 2014 Advocate Health Care and Silver Cross Hospital announced a clinical integration affiliation agreement. Advocate is the state’s largest hospital network and Silver Cross is an independent, suburban hospital. The Chicago Tribune reported on details:

Under terms of the affiliation, which is slated to last a minimum of five years, about 300 doctors who practice at Silver Cross will join Advocate Physician Partners, a 4,400-doctor organization jointly governed by Advocate and the physicians…

Although the hospital will retain its brand, board and balance sheet, it will enter into contracts with insurance companies and government programs under Advocate, and its physicians will fall under Advocate Physician Partners. Advocate will treat the hospital like any of its other 11 facilities financially, assigning pro-rata costs to the Silver Cross in the same way it would Advocate Christ in Oak Lawn or Lutheran General in Park Ridge.

As noted a February article in Crain’s Chicago Business, the intent of the agreement had been to allow Silver Spring to participate in Advocate’s accountable care organization network and to negotiate contracts jointly:

For New Lenox-based Silver Cross, the deal means participation in programs in which providers and hospitals are paid in part for good outcomes rather than volume. It wouldn’t have been able to launch these on its own due to the hefty investments needed to start from scratch. “It’s a make-or-buy decision,” said Ruth Colby, Silver Cross’ senior vice president of business development and chief strategy officer. “When we saw that we could do an affiliation, we felt we could rapidly get ready for changes in reimbursement.”

However, the state’s dominant health insurer has said “Not so fast”. The headline of an October 8 article in Crain’s Chicago Business read “Blue Cross delivers blow to small hospitals”

Blue Cross won’t negotiate reimbursement rates with affiliations created by separate health systems that clinically integrate rather than those under common ownership, Dr. Lee Sacks, chief medical officer of Downers Grove-based Advocate, said during a meeting yesterday with the Crain’s Chicago Business editorial board.

So, what we have here is a new slant on an old issue — the fight for market power among health plans and care providers. Health plans will prefer a “divide and conquer” strategy, while providers will prefer a “united we stand” strategy toward pricing and contract negotiation.

Why It Matters

The Illinois scenario is a pretty good prototype of market dynamics in many other markets across the U.S. — a dominant health plan, a strong regional delivery system, and a smaller independent hospital. Similar affiliation scenarios are likely to play out in markets across the country, but will the results be the same?

Physicians face great uncertainty. According to a survey conducted by The Physicians Foundation, the great majority of physicians (89%) believe the traditional model of independent private practice is either “on shaky ground” or “is a dinosaur soon to go extinct.”

In the face of this uncertainty, many physicians are jumping to a conclusion that “I have to sell my practice to the hospital.” In this post of our series on The 100 Year Shift, we will examine physician practice. We’ll show that the economic and clinical environment is changing rapidly and that selling to the hospital is one option. However, it is not the only option.

Table of contents for the series--The 100 Year Shift? Strategic Realignment among Physicians, Hospitals and Payers

In our introductory posting of this series, we noted that economic incentives previously aligning doctor-hospital interests were changing. This creates the potential for The 100 Year Shift – physicians awakening to possibilities for stronger partnerships with payers than with hospitals.

In this post, we will zero in on the changing economic position of hospitals and the effect this is having on physician-hospital relationships. We will examine the trend of hospital employment of physicians and point out challenges and tensions for the future. [This is a long post…so now might be the time to refill your coffee cup.]

Table of contents for the series--The 100 Year Shift? Strategic Realignment among Physicians, Hospitals and Payers

IMHO, the recent acquisition by Highmark Blue Cross Blue Shield of West Penn Allegheny Health System (WPAHS) for $475 M is unique to local market conditions. It was done as a last resort and should not be taken as a signal that health plans are starting a hospital buying binge.

Major U.S. health insurers, including Aetna Inc., Humana Inc. and WellPoint Inc., are retooling to become more than just health plans, in the wake of the federal health-care overhaul that is changing the rules for the industry’s core business.

Diversification plans, touted in meetings with investors this year, include stepped up acquisitions and partnerships that will allow the companies to employ doctors directly, deliver health-information technologies, and participate in new hospital-doctor groups known as accountable-care organizations.

For more details and discussion, tune in to tomorrow to BlogTalk Radio. Host and ACO guru Gregg Masters will be interviewing me and we’ll discuss the topic of “Is Hospital-Physician Integration Sustainable?”

The great momentum brought about by government and private payers demand for more accountability is unstoppable. Rapid consolidation of hospitals and consolidation of physicians by physician groups, hospitals and now insurers will shift referral patterns and consumer preference. 1 out of 4 hospitals will fall short of providing value and close or be absorbed within 10 years.

Physicians will be offered higher prices to sell out to insurers and investors who value the short supply of PCPs and will try to control care demand by retooling the care system building ASC and small scale short stay hospital.

True clinical integration will follow for the survivors. The ability to prospectively develop clinical budgets and bundles of services will connect regional tertiary and quaternary care facilities to local hospitals so integration can be regionalized across larger populations and payer segments.

Once these delivery systems realize they need a product recognizable to individual consumers they will seek alliance with select insurers or create their own insurance company thereby achieving the true definition of integration which is to integrate financing and delivery of care.

This offers the shared savings with themselves and stabilizes patient flow and overhead to achieve value to purchasers and users of care.

We think these opportunities will be at a tipping point on a market by market basis over the next 5 years and will be a national definition of success within 8 years. We believe this will happen because already the bond rating companies are looking at physician alignment and payer alignment as factors in establishing credit worthiness of hospitals for expansion and mergers.

Integration is certainly on the rise. The notion of independent physicians may be a myth because so-called independent physicians are becoming increasingly financially tethered to hospitals. In fact fifty-six percent of physicians PwC surveyed want to more closely align with a hospital in order to increase their income. The new health reform law focuses on population health and adopts a Medicare compensation model that penalizes poor quality and rewards cost savings and electronic information sharing. Some commercial payers are also pushing this business model.